The U.S. Debt Ceiling: A Historical Look

By Daniel Indiviglio

The coming debt ceiling battle is the topic du jour in Washington. Republicans argue that simply raising the ceiling over and over again is an unsustainable policy, so they're demanding budget cuts. Many democrats agree that the U.S. has a deficit problem, but they stress the necessity of raising the ceiling promptly, to prevent default or problems funding other U.S. obligations. When assessing the need for fiscal reform, it helps to look back at the past.

The debt ceiling was first set in September 1917. At that time, Congress authorized the issuance of about $7.5 billion in U.S. bonds and another $4 billion in certificates of indebtedness, under the Second Liberty Bond Act. How much was $11.5 billion dollars back then if you account for inflation? In March 2011 dollars, it would be $193.2 billion. Currently, the debt limit is set at $14.3 trillion -- so inflation doesn't tell the whole story! To be sure, Washington's love affair with debt has grown.

So first, here's the debt limit throughout history, charted along with actual U.S. debt outstanding:

The chart shows that the debt ceiling (thick red line) didn't even hit $1 trillion until 1982 -- less than 30 years ago. Since then, it's increased exponentially. Of course actual debt outstanding (thin green line) moves pretty much in sync with the debt ceiling, as it generally only rises when the government decides to issue more debt.

You can see the ceiling is a sort of step function, as it increases based on Washington's whims, not a natural mechanism. This chart also shows that increases in the debt ceiling are quite common. Over the 94-year period, the debt ceiling has been revised 102 times.

Another good way to look at debt is by considering its ratio to the nation's GDP. This both provides an estimate for how much the U.S. is borrower compared to how much it's producing and allows inflation to drop out. Here's the chart (GDP data is only available from 1929):

Several interesting things are happening in this chart:

You can clearly see the Great Depression. GDP was very low over that period, so the debt ceiling-to-GDP-ratio was quite high.

The U.S. increased the debt ceiling significantly to fund World War II. During the war, it soared above 100% for the first time -- and hasn't since. It subsequently fell, however, as U.S. growth took off.

The ratio of the debt ceiling-to-GDP was the lowest in January 1981. At that time, the ratio was just 30.6%.

The highest the ratio has been since World War II was in February 2010, when it hit 98.9%. As of March 2011, the ratio was 95.3%.

Depending how high Congress raises the ceiling in coming months, it could potentially surpass 100% again. It would take at least a $700 billion increase: currently the ceiling is set at $14.3 trillion and would have to be a little greater than $15 trillion to move past the first quarter's annualized GDP estimate. The last time Congress raised the debt ceiling, in February 2010, it increased the limit by almost $2 trillion.

While this history may be interesting, it doesn't necessarily help policymakers decide whether or not to raise the debt ceiling this time around. That needs to be a determination of whether the potential harm of the budgetary cuts necessary to avoid raising the ceiling are worth the risk they pose to the U.S. economic recovery.

But the history does help show the need for longer-term fiscal reform. The U.S. isn't fighting a world war, but the nation's government is borrowing like it is. U.S. debt shouldn't be anywhere near 100% of GDP. Congress needs to either cut its spending, raise taxes, or both to cure its addiction to debt.

A quick note on the data: The charts are all using monthly periods, since that's how the debt ceiling changes were most easily captured. Of course, GDP is only available quarterly, and only annually from 1929 to 1946. Moreover, historical debt outstanding was only available annually until 1993, after which time monthly data was used. So the charts paint the most accurate pictures possible with the data available.